Factual Summary: A letter of credit was issued in favor of the "Society and Council of Lloyd's" with the phrase "c/o Membership/Deposits Dept." on the line immediately below. The drafts were required to contain, on their face, the clause "Drawn under Whitney National Bank of New Orleans Letter of Credit No. 24416, dated December 12, 1983."

The paying bank received a sight draft containing the phrase "The Corporation of Lloyd's" in the upper left corner and "For and behalf of The Society& Council of Lloyd's" followed by the words "Authorized Signatory, Membership Department" at the bottom right of the draft but omitting the LC number. The paying bank honored the draft and the issuer subsequently reimbursed the paying bank. Due to a forum selection clause which the applicant entered into, there was little possibility of obtaining an injunction against the paying bank in the action for wrongful honor.

When the issuer sought reimbursement, the applicant brought an action for wrongful honor, claiming that the named beneficiary was the "Society and Council of Lloyd's" and the draft named "The Corporation of Lloyd's" as the beneficiary in violation of the rule of strict compliance. The applicant also claimed that since the beneficiary fraudulently induced him to enter into the underlying transaction, the issuer was not obligated to honor the demand. The issuer moved for Summary Judgement. The court granted the issuer's motion.

Legal Analysis:

1. Wrongful Honor: Compliance: Payee of Draft: The court ruled that a draft drawn on a letter of credit must strictly comply with the terms of the LC. If it does not do so, the demand should not be honored. The court ruled that "The Corporation of Lloyd's" in the upper left corner of draft was simply part of the address while the beneficiary was "The Society& Council of Lloyd's" since it was preceded by the words "For and behalf of". The inclusion of the word "The" and an ampersand &) in place of the word "and" was held to be insufficient to violate the rule on strict compliance.

2. Draft: Recital of Reference to LC: The court also noted that the draft failed to include the phrase "Drawn under Whitney National Bank of New Orleans Letter of Credit No. 24416, dated December 12, 1983." However, since the applicant had failed to raise this point, the court concluded that it had been conceded as being insignificant (i.e. under the de minimis rule).

3. Fraud in the Transaction: The applicant claimed that the issuer's obligation to pay on presentation of conforming documents is excused by the presence of fraud in the underlying transaction. The applicant claimed that the beneficiary had committed fraud by inducing an investment through fraudulent misrepresentations and material omissions. Courts in other jurisdictions have concluded that the fraud must be so egregious as to vitiate the entire transaction. The Louisiana Supreme Court distanced itself from this standard in theCromwell 1 case.Instead it adopted a standard of "intentional fraud" where there is evidence of a "misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or cause a loss or inconvenience to the other."

(1.) Cromwell v. Commerce & Energy Bank of Lafayette, 464 So. 2d 721 (La. 1985).

The court in this case adopted this latter standard and even went so far as to accept that fraud could have occurred. However, it noted that if the issuer honored the draft in good faith, the question of fraud is irrelevant. The existence of fraud simply provides the issuer with an option not to pay on a conforming presentation. The issuer cannot be bound by a mere suggestion of fraud since if it failed to honor a conforming presentation for this reason and fraud was later proven not to have occurred, the issuer is left open to a claim of wrongful dishonor. The only exception to this rule would be where an injunction prevents the issuer from honoring a demand for payment.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.